When the Warehouse and Secured Lender Battle Dont Forget about the Common-Law Storage Lien

Journal Issue

Feb 2006

Column Name

Lien on Me

Citation

ABI Journal, Vol. XXV, No. 1, p. 28, February 2006

Topic Tags

Practice and Procedure

Uniform Commercial Code/Article 9

Journal HTML Content

Imagine the following scenario: Customer stores goods with a
warehouseman. While
the goods are in the possession of the warehouseman, the customer goes
out of
business. The warehouseman, unpaid, attempts to sell the goods to pay
its unpaid
storage charges, but finds that the customer’s secured lender
claims a
superior interest in the goods by virtue of a security interest
properly perfected
before the goods were placed in the warehouseman’s possession.
As discussed
below, case law usually, but not always, finds that a
warehouseman’s lien
granted by the Uniform Commercial Code (UCC) is subordinate to the
interest
of a previously perfected secured creditor. Nonetheless, if our
warehouseman
finds its UCC lien subordinated, state statute or common law may
provide an
avenue to prime the secured creditor. Given the Bankruptcy Abuse
Prevention
and Consumer Protection Act of 2005’s (BAPCPA’s) greatly
enhanced
protection of warehousemen’s liens, the priority of these liens
is of
utmost importance.1
 The Warehouseman’s UCC Lien
 Under §7-209 of the UCC, a warehouseman has a lien against the
bailor
on the goods in the warehouseman’s possession for unpaid storage
and transportation
charges. At bare minimum, this lien is a “specific” lien
attaching
to the goods held by the warehouseman, but depending on the wording of
the receipt
or storage agreement, it can expand to a “general” lien
covering
“like charges in relation to other
goods.”2 Thus, our warehouseman
finds itself in the enviable position of having a lien on the goods to
help
defray the unpaid storage charges. However, the lien is possessory,
and the
warehouseman loses his lien on any goods he voluntarily delivers. UCC
§7-209(e).
Likewise, an unjustifiable refusal to deliver the goods may result in
loss of
the lien. Id.
 But what is the priority of the warehouseman’s lien in
relation to the
secured lender’s lien? Under §9-333 of Revised Article
93
(RA9), the warehouseman’s lien, being possessory, has
“priority
over a security interest in the goods unless the lien is created by a
statute
that expressly provides otherwise.” In other words, RA9
provides
that if the possessory lien derives from common law, or derives from a
statute
that is silent as to the lien’s subordination to existing
security interests,
then the possessory lien has priority over a previously perfected
security interest.4

In our scenario, our warehouseman has asserted a lien under the UCC,
so the
lien derives from statute. But §7-209(c) of the UCC has the
“provides
otherwise” language, which may trigger subordination of the
warehouse
lien since a lien is only “effective against any person that so
entrusted
the bailor with possession of the goods that a pledge of them by the
bailor
to a good-faith purchaser for value would have been valid.” UCC
§7-209(c).
Thus, our warehouseman’s lien is not effective as against the
secured
party unless the circumstances surrounding deposit of the goods to the
warehouseman
was such that “a pledge by the [customer] to a good-faith
purchaser for
value would have been valid.”5
Likewise, our warehouseman’s lien
is not effective against a security interest held by the secured
lender unless
the secured lender so entrusted the customer with possession of the
goods that
a pledge of the goods by the customer would have given a
“hypothetical
bona fide pledgee” priority over the secured lender. Official
Comment
3 to UCC §7-209.
 Cases Finding Warehouseman’s UCC Lien Subordinated to Prior
Perfected
Security Interest
 K Furniture Co. v. Sanders Transfer & Storage Co., 532
S.W.2d 910
(Tenn. 1975), nicely illustrates the use of the hypothetical
“good-faith
purchaser” or “bona fide pledgee” doctrines to
subordinate
a warehouseman’s lien to that of a previously perfected secured
lender.
In this case, a consumer purchased household furniture on credit,
granting the
seller a valid purchase money security interest (PMSI). The furniture
was then
placed in storage by the customer’s wife. The customer defaulted
on the
payment, and the secured lender sought to recover the furniture. The
warehouse
asserted its lien rights under §7-209 of the UCC. In holding for
the secured
lender, the K Furniture court noted that there was nothing in
the record
to indicate that the secured lender had “delivered or entrusted
the furniture
to [the customer’s wife] with the actual or apparent authority
to store
the furniture....”6 As such, the
security interest of the secured lender
took priority over the warehouseman’s lien. Notably, the court
makes no
mention of whether its holding would have been impacted if the
customer, as
opposed to his wife, placed the furniture in
storage.7

In re Siena Publishers Associates, 149 B.R. 359 (Bankr.
S.D.N.Y. 1993),
reached a similar conclusion. In this case, the debtor, a book
wholesaler, outsourced
its order fulfillment and warehousing services to MSI. The
debtor’s assets
were sold in bankruptcy, with any liens to attach to proceeds of the
sale. The
debtor’s secured lender perfected its security interest in the
debtor’s
assets prior to MSI’s warehouse lien. The court found that
though MSI
retained possession of the inventory, its warehouse lien was
subordinated to
the bank’s security interest because “the debtor could not
validly
pledge its inventory to a bona fide pledgee for value because the bank
possessed
a validly perfected security interest in all of the debtor’s
assets, including
its inventory.” In re Siena Publishers, 149 B.R. at
364.8
 Cases Finding Warehouseman’s UCC Lien Not Subordinated to
Prior Perfected
Security Interest
 In re Sharon Steel Corp., 176 B.R. 384 (Bankr. W.D. Pa.
1995), presents
a bankruptcy court determining that a security interest held by a
secured lender
in certain of the debtor’s inventory was subordinate to later
arising
liens in the same inventory held by multiple warehousing companies. In
analyzing
the priority of the warehouseman’s liens against the secured
lender’s
security interest, the Sharon court agreed that “[w]here
the third
party is the holder of a security interest, the rights of the
warehousemen depend
on the priority given to a hypothetical bona fide pledgee....”
Sharon
Steel Corp., 176 B.R. at 387-88.

However, the Sharon court found for the warehousemen.
Importantly,
the court noted that “under the loan documentation, the debtor
was permitted
to incur warehouseman’s...liens in the ordinary course of
business, and
that such liens were ‘permitted liens’ under the security
agreement.”
See Id. at 388. The court then noted:
 By permitting the debtor to store inventory [with the warehouse-men]
and permitting
the debtor to incur warehouseman’s...liens in the ordinary
course of business,
[the secured lender] effectively permitted the debtor to transfer its
inventory
to the pledgees [the warehousemen] as security for the
[debtor’s] payment
of the warehouseman’s...liens.
 Accordingly, the court held that the prior perfected security
interest of
the secured lender was subordinate to the liens held by the
warehousemen. Thus,
our warehouseman would be advised to analyze the security agreement
and other
loan documents between the secured lender and the customer to
determine if these
documents create an argument that the secured lender has clothed the
customer
with sufficient authority to meet the hypothetical “good-faith
purchaser”
or “bona fide pledgee” requirements.
 A Prior Perfected Security Interest May Be Subordinate to
Possessory Storage
Liens Under State Statute and/or Common Law
 As shown, the party claiming a UCC warehouse lien may find itself
with a valid
lien claim, but one that is subordinated to a previously perfected
security
interest. However, even though the UCC lien may be subordinated to
that of the
secured lender, a common-law possessory lien would not be subordinate.
Recall
that under RA9-333, a possessory lien has “priority over a
security interest
in the goods unless the lien is created by a statute that expressly
provides
otherwise.” Common-law liens, not being based on statute, would
not trigger
subordination under RA9-333. Likewise, a non-UCC possessory storage
lien created
by a statute that did not expressly provide for subordination to a
security
interest should likewise defeat subordination.
 Use of common-law principles by a warehouseman to prime a secured
lender is
shown by the recent case of Charter One Auto Finance v. Inkas
Coffee Distributors
Realty, 57 UCC Rep.Serv.2d 672, 39 Conn. L. Rptr. 110 (Conn.
Super. Ct.
2005). In this case, the secured lender held a PMSI in an automobile.
The automobile’s
owner stored the vehicle in a parking lot located in the state of
Connecticut.
The customer defaulted on its loan obligations, and the secured lender
demanded
possession of the automobile from the parking lot. The parking lot
refused to
release the vehicle until its storage fees were paid. The secured
lender sued
the parking lot in replevin. The parking lot counterclaimed, arguing
that its
common-law and statutory-lien rights (including a §7-209 lien)
were superior
to the secured lender’s claim.

In ruling for the parking lot, the court noted that Connecticut law
recognized
a common-law possessory lien for storage.9
As such,
 This possessory lien is not premised on a statute; accordingly, the
“unless”
part of §9-310’s [RA9-333] rule is inapplicable. Also, the
court
is unaware of a statute which expressly provides that a perfected
security interest
has priority over such a common law possessory lien....
 Since the parking lot prevailed on its common-law lien, the court
did not
address the portions of the counterclaim brought under UCC
§7-209. See,
also, Nat’l. Bank of Joliet v. Bergeron Cadillac Inc., 66
Ill.2d 140,
143 (Ill. 1977) (stating that the “the artisan’s
possessory lien
of the common law is recognized in Illinois” and that since the
artisan’s
lien is nonstatutory, the statutory subordination provision in
§9-310 [RA9-333]
is not applicable).
 Conclusion
 The situation presented to our warehouseman is not unlike that
presented to
a reclamation creditor whose recovery on an otherwise valid claim is
trumped
by a secured creditor with a previously perfected security interest.
Our warehouseman’s
odds of priming the secured lender are improved by a showing that the
secured
lender consented, by loan agreement or perhaps otherwise, to the
customer’s
placement of the goods in storage, since such showing goes to the
hypothetical
“good-faith purchaser” or “bona fide pledgee”
requirements
of §7-209. Our warehouseman may also argue that state common law
or statute
gives it an additional possessory storage lien not subordinated under
RA9-933.
n
<blockquote>

<hr>
<h3>Footnotes</h3>

1 11 U.S.C. §546(i) (stating that “the trustee may not
avoid a warehousemen’s
lien”). 
2 See Official Comment 1 to Model Version of UCC
§7-209. 
3 Formerly UCC §9-310.

4 See Official Comment 2 to Model Version of UCC
§9-333. 
5 Official Comment 3 to UCC §7-209. Factors to consider include
the “actual,
implied or apparent authority of the depositor.” Reference is
also made
to UCC §§7-503 and 9-322 of RA9. 
6 K Furniture Co., 532 S.W.2d at 912. 
7 The model version of UCC §7-209 has a subsection (d) providing
that a
warehouseman’s lien on “household goods” is
effective “against
all persons.” Thus, under this provision, a warehouseman’s
lien
on household goods should defeat a previously perfected secured
creditor. Not
all jurisdictions have adopted this provision, though.

8 The Supreme Court of Idaho reached a similar decision in Curry
Grain Storage
Inc. v. Heston Corp., 815 P.2d 1068, 1071 (Idaho 1991), in which
the lien
of warehouseman holding seed for a customer was subordinated to that
of the
customer’s secured lender since the secured lender had not
“so entrusted
[customer] with possession of the seed that a pledge of the seed by
[customer]
to a good-faith purchaser for value would have been valid.”
After that
decision, the Idaho legislature enacted a parallel provision to 7-209,
Idaho
Code §28-7-209A, which allowed warehouseman liens for
“agricultural
commodities” to have priority over a previously perfected
security interest.
See AG Services of America Inc. v. Kechter, 44 P.2d 1117,
1121-22
(Idaho 2002). However, §28-7-209A of the Idaho Code was recently
repealed.
 
9 Not all states recognize a common-law possessory lien for storage.
See,
e.g., Jewett v. City Transfer & Storage Co., 18 P.2d 351 (Cal.
Dist.
Ct. App. 1933) (stating at common law, warehouseman had specific lien
for proper
storage charges); Pennsylvania Indus. Finance Ass’n. v.
Thomas,
18 Pa. D. & C. 367 (Pa. Com. Pl. 1933) (warehouseman has
common-law right
of lien for storage charges on goods in his possession); Reebie v.
Brackett,
109 Ill. App. 631 (Ill. App. Ct. 1903) (warehousemen at common law had
lien
upon goods for services performed in relation to them). But, for a
contrary
view, see Mack Motor Truck Corp. v. Wolfe, 303 S.W.2d 697 (Mo.
Ct. App.
1957) (stating that no lien for storage exists at common law.);

Minnehoma
Financial Co. v. Pauli, 565 P.2d 835 (Wyo. 1977) (stating there
was no common-law
lien for storage, and therefore, such a lien can only be acquired by
statute);
Fitzhugh v. City of Douglas, 596 P.2d 737 (Ariz. Ct. App. 1979)
(stating
that right to a lien for storage costs is strictly statutory, and such
a right
did not exist at common law); Williams v. International Co.,
141 P.2d
837 (Or. 1943), overruled on other grounds, Rogue Val. Mem. Hosp.
v. Salem
Ins., 510 P.2d 845 (Or. 1973) (stating there is no common-law
lien
right for recovery of costs for storage of vehicles). Further, even
though a
state may have at one time recognized a common-law lien, such
common-law rights
can be abrogated by later statute.

Journal Authors

Kevin C. Driscoll

Journal Date

Wednesday, February 1, 2006 - 12:00

Bankruptcy Rule

2006

none